In automated trading of financial instruments different trading parties, members of the exchange, send in their orders to the computerized exchange which tries to match the orders with other orders received previously. If the order cannot be matched directly the order can be stored in an orderbook and displayed to other trading parties connected to the automated exchange. The orders can be displayed either indicating what trading party has placed the order or not indicating what trading party has placed the order. If there is no indication of what trading party has placed a particular order, this is usually termed an anonymous market.
An anonymous market is in many cases preferable to a market where all trading parties (members) can see who has placed a particular order. However, in some markets there are potential differences between the orders, and more specifically, differences between customers that own the order. In particular there may be counter party risk involved. The counter party risk is the expected cost of possible credit and “moral hazard” losses associated with the chance that a financial counterparty will default on its contractual obligation.
In most exchange traded derivative markets the clearinghouse clears almost all orders. Hence the participants know the counter party risk of any order executed on this market. However, in some other markets, like for example the bond, currency, and warrants markets the trading is usually anonymous, but the full counter party exposure usually still exists when trading. In order to counter balance this some firms may be restricted on the counter parties with which they can trade. But, since the market is anonymous, the trader needs to obtain information on the owners of the orders in the market or at least information if the trader is allowed to trade against the order in the market.
One possible way that may be employed to solve this problem is to send information instructing the automated exchange not to match against orders placed by certain trading parties. For example the U.S. Pat. No. 5,136,501 discloses a matching system for automatically matching bids and offers for given trading instruments where counter party credit information is used to block trades in excess of a counter party credit limit. In the system disclosed in U.S. Pat. No. 5,136,501, the parties trading in the system cannot identify the bids and offers that will result in a blocked trade before trying to execute a particular trade. Hence, a trader will not know if an order is allowed until the trader tries to match that particular order, and the system then either accepts the deal or blocks the trade.
This problem is overcome by the system disclosed in the U.S. Pat. No. 5,375,055 where the system is supplemented by a number of pre-screening nodes that screens all bids and offers that would result in a blocked trade. The system as described in U.S. Pat. No. 5,375,055 will require a large number of additional screening devices connected to the automated exchange, in particular if the number of different trading parties is big.
A similar solution is described in U.S. Pat. No. 5,924,083. Like U.S. Pat. No. 5,375,055, the system disclosed in U.S. Pat. No. 5,924,083 requires additional hardware. In U.S. Pat. No. 5,924,083, a number of intelligent nodes are added to accomplish the task of filtering orderbook information. An additional drawback of the systems as described in the U.S. Pat. Nos. 5,924,083 and 5,375,055 is that only tradable orders are displayed to each trader, thereby depriving the trader of valuable market information.
A further drawback of all these systems is that the decision on what orders that are tradable is “hard”. Thus, in the case of the system as described in U.S. Pat. No. 5,136, 501, a trade between parties having exceeded their credit limit will be blocked unless the credit limits are changed. In the case of the systems described in U.S. Pat. Nos. 5,924,083 and 5,375,055 the orders that would result in a trade exceeding the credit limit are not even displayed to the traders. However, in some cases the trading parties may not want to apply a hard (on/off) determination on what counterparties to enter into a transaction with, but rather a recommendation (soft determination) on which orders to trade against. Preferably the system should also provide information on the entire market and not only the orders the trader is allowed to trade against.